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7_DummyVariables

7_DummyVariables

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Categories:Business/Law
Published by: ermodi20052082 on Jun 16, 2012
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EconometricsMultiple Regression Analysis with QualitativeInformation: Binary (or Dummy) Variables
Jo˜ao Valle e Azevedo
Faculdade de EconomiaUniversidade Nova de Lisboa
Spring Semester
Jo˜ao Valle e Azevedo
(FEUNL)EconometricsLisbon, March 2011 1 / 11
 
Dummy Variables
A dummy (or binary) variable takes on the value 0 or 1 and are oftenused as regressorsDummy variables are also called binary variables, for obvious reasonsExamples:
wage 
=
β
0
+
β
1
Education
+
β
2
Experience 
+
β
3
Male 
+
Male 
(= 1 if individual
is male, 0 if female)
If 
β
3
>
0, there is evidence of discrimination against women
wage 
=
β
0
+
β
1
Education
+
β
2
Experience 
+
β
3
Sporting 
+
Sporting 
(= 1 if individual
supports Sporting)
Can use all the inference tools learned so far, as long as the necessaryassumptions hold!
Jo˜ao Valle e Azevedo
(FEUNL)EconometricsLisbon, March 2011 2 / 11
 
Dummy Variables
Consider a simple model with one continuous variable (
) and onedummy (
)
=
β
0
+
δ
0
+
β
1
+
This can be interpreted as an intercept shift
If 
d=0 
, then
=
β
0
+
β
1
+
If 
d=1
, then
= (
β
0
+
δ
0
) +
β
1
+
We call the group of individuals with
d=0 
is the base group
Jo˜ao Valle e Azevedo
(FEUNL)EconometricsLisbon, March 2011 3 / 11

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